Direct PE to Pension/Endowment

Realize people usually want to go the other way around (i.e., from less direct investing roles to direct PE), but the longer I spend doing direct PE, getting increasingly jaded and disillusioned, the more obvious it is to me that the apex predator in finance may actually be the LPs, not the classic archetypical private equity sharks. PE guys generally bend over backwards to serve their important LPs (the CPPIBs of the world, etc.). But it also feels more long-term intellectually stimulating to zoom out a bit and manage capital a bit more holistically, eventually developing into a CIO-type role, vs. negotiating working capital pegs and the myriad other painful things you need to deal with in PE. Thoughts? Am I crazy?

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Comments (25)

  • VP in VC
Jun 13, 2020 - 11:56am

I once talked with a guy at an E/F ($5-$10B) who loved his job, was out of the office by dinner time, managed a strategy (eg HF or PE/VC or NatRes/Real Assets) and made about $1m/year (top 1% for his location, you can buy most of what you want that's reasonable on that money) and said life felt good because he knew every marginal dollar he made for the E/F was going to a cause(s) he believed in. He never had to sell, never had to deal with client bullshit, just loved his job. CIOs at his size org made $2-3m/year. It's the ultimate lifestyle job full stop.

  • Associate 2 in PE - Other
Jun 13, 2020 - 12:18pm

You just confirmed everything I suspected was true and make me even more convinced this is the optimal seat to be in. Thanks this is super helpful data point

  • Investment Manager in HF - Other
Jun 13, 2020 - 12:07pm

Not exactly the same, but I have a few friends thinking (and have thought of myself) of making the move from buyside (HF) to pension/endowment. The things I would say are:

1) no you are definitely not crazy
2) make sure you find the right place (i.e. CPPIB is ahead of the curve compared to most pension funds when it comes to investment mandates, etc, while some places have a lot less sophistication which might be boring for you)
3) the culture can be pretty different, while these places have high caliber people as the other poster said: you aren't selling, it isn't as cutthroat, work life balance is a real thing, from what I've seen it operates a lot more like a team than I've seen in HF at least.
4) the money at the top places is good, but obviously less than private firms (although a lot more stable). The people I know are MD level people and the overall package is around $1mm (although this is top people at the top places, at most other places you'll be looking at $600ish for senior people). But keep in mind many of these pensions also have pretty nice pension benefits (that I'm including in the package above, but they can be substantial over time (invested in their funds))

  • Associate 2 in PE - Other
Jun 13, 2020 - 12:19pm

Thank you this is very informative. I am surprised more people do not want to make this move. Are the people you know managing direct strategies? Or managing allocations to managers?

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Jun 13, 2020 - 12:28pm

Thank you this is very informative. I am surprised more people do not want to make this move. Are the people you know managing direct strategies? Or managing allocations to managers?

Plenty want to but there aren't that many seats. Plus like anything else why would an allocator take a risk on some unproven new guy when they could find someone who has done the gig well for over 10 years who they actually know from the very small LP circuit, and know that they have the skills and fund relationships?

And making that shift from deals to allocation doesn't come easily to many. A lot of it is mentality. A lot of it is actual lifestyle and personality. As I said in another post, it's definitely doable but it is a big shift in thinking, which is not easy the older one gets.

Depending on the shop those managing direct strategies range from relying on GP DD and sort of checking it out and testing assumptions to being much more involved. The latter will have the capacity to work pretty long hours during deal times.

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
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  • Investment Manager in HF - Other
Jun 13, 2020 - 12:36pm

The people I know are on both sides, although the majority actually end up doing direct investment for the pension funds. Although that can be longer hours, the culture and hours are still better than what I've seen at HFs. There is more pressure on direct investing (you need to still make money) so in that sense it can be similar to a HF, but the time horizon is different, the risk can be pretty different, and the way the teams work together is different.

The allocators have a relatively cushy life but I've heard that can get a bit boring and as others have said tedious. There are only so many good managers, you get group think (if you don't allocate to the big funds you better make sure you outperform), and while you are learning a lot of it can still be surface level. Still a great role, but I think less "exciting" than the direct investment side.

Most Helpful
Jun 13, 2020 - 12:23pm

All the above posts in this thread are totally true. And I can tell you having been in the allocation business that often LPs are the ones with the power. One gets to literally see everything which is how you find out that most funds across the spectrum are garbage.

At the same time like anything in this business everyone fights to get in the few good products so there is a lot of crowding and group think.

The work life balance is good though. But I would warn at places like CPPIB in Asia they are getting paid a lot but also being worked a ton (often unnecessarily so - does one really need to work 80 hour weeks to commit to KKR Asia or CDH?).

The big allocators see the best funds and get access. The pay also good. But like any work, it can be tedious, too distant from reality and boring. And the big products you know you will commit to anyhow so it's just a process. Then there are lots of interesting small products that can really grow or generate alpha (whatever that means) but you can't do it because it's not scalable and won't move the needle or that IC won't go for it.

Having done both directs (HF PM) and allocating, I think anyone can be an allocator or a direct investor (note I didn't say one could be good at either). I also strongly believe that there are many high level commonalities between the work. This is not a popular opinion but it is mine, because I believe none of any of this work is rocket science, and if I can do it, anyone can (I am not anything special intelligence-wise). It just takes time and maybe a mentor and some experience. Like in all things.

Paramount similarities at a high level are questions such as "will this make us money? What's the risk level? What are my alternative choices? What can I pitch to my boss/IC? How does this fit in the portfolio? How can I mitigate risk? Do we have to chase? Where are we in the market/world today? Etc etc etc"

The work life balance is absolutely far better but you are getting paid much less with much less upside as well. Think about it as being long some nice coupon bonds vs long equities (not a perfect analogy, I know). People also treat you nicely because you have all the money. Because the hours are better and less stressed and the pay isn't as high your colleagues are actually nice and actually helpful. You can absolutely spend time with friends and family and take vacations. There is kind of a community within certain LPs as well in exchanging ideas, making introductions etc etc.

I hope that this is helpful

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
  • 12
Jun 13, 2020 - 11:17pm

Anytime. It is literally why I am on this board

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
  • 3
Jun 14, 2020 - 3:59pm

It's good to ask these questions but in my opinion, yes you are crazy. Giving up money and challenge so you can have the power trip of being the client who's never wrong, seems a little insane to me.

Personally, I don't have a high opinion of the pensions, at least in the US. They outsource waaaay too much of the thinking, either to GPs or consultants like Cambridge. They leave little challenge left for themselves and the comp reflects it.

We all hear that it's much better in Canada, oh the vaunted Canadian pension model. I'll admit I don't know for sure how true it is, but I have my doubts. The ones I know who've made that move were looking to make a lifestyle trade, not to move up the food chain.

Capital Allocators podcast with Ted Seides is a good resource for learning more about it.

  • Associate 2 in PE - Other
Jun 14, 2020 - 4:50pm

Thanks. You make a valid counterargument. Yes, being a long time listener of that podcast was what initially got me interested!

Jun 14, 2020 - 4:48pm

I'm not disagreeing with you here (yes pensions/endowments etc aren't the sharpest tools in the shed - but I'd argue, neither are most funds - the returns will show that).

But remember, the trade is money (or the potential for it)/challenge versus time AND power.

A middling LP seat gets you a few hundred Gs in pay with little volatility in pay/job status, better hours, little noteriety (ie. no one is going to burn down your office and call for your head when things are politically volatile) AND the ability to tell most GPs to take a hike. And then you can go home and go for a bike ride/cook at home/have sex with your spouse/hang out with your kids, or some combination of all of the above.

It's not a trade for everyone. But it's certainly a valid/understandable trade. I say this as someone who has done both (and frankly certainly enjoy the direct side much more).

However, I certainly feel that the sooner people figure out that they will not be the next Bill Ackman or Henry Kravis, the better. The lifespan of most people in the direct business is not long and then its a scramble for them to figure out the next thing (and I don't mean the 45 year old MD or Director who wants a change), but folks 1-2 steps lower, ie. mid level professionals. I've seen it way too many times.

PS - agreed on the Canadians. They just have a lot of money. But they are so big that they too, can't do much innovative stuff. They may pay more to attract talent, but I haven't heard of them making more money as funds. Generally their direct investment talent is definitely a step below that of GPs. Once again, the work/life thing. But in Asia it's weird because so many people at CPPIB work these insane hours without even a mirage of something at the end, compared to say, at some PE/HF.

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
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  • Associate 2 in PE - Other
Jun 14, 2020 - 4:54pm

Thanks, this is helpful and good stuff for me to hear. I am a junior direct PE guy right now and I just don't see myself doing this much longer. I haven't written off direct, and I am still trying to figure out how much of what I am currently struggling with is idiosyncratic to my firm. But this is helpful as I frame up my potential alternatives

Jun 14, 2020 - 5:00pm

The "most helpful post" in the thread "Any career regrets after moving from PE to public markets?" is good to look at as well for some reference (in that it is probably not idiosyncratic to your firm). I'd mention the user that wrote that post (I SB'ed his post) but I can't seem to get his name to pop up...

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
  • 1
  • Analyst 2 in IB-M&A
Jun 15, 2020 - 12:04am

Interesting post. I'm starting as an associate in direct PE in two months and have also been thinking more and more about this path. I did an internship in college at an endowment and had a fantastic experience resulting from great culture, amazing lifestyle, intellectually stimulating work and conversations (although obviously there is some tedious work).

Anyone know how jobs are typically filled (headhunters / LinkedIn?) or at what title someone coming in from 2 years banking + 2 years PE would be?

Jun 16, 2020 - 6:15am

Your best bet is a network search, ideally through warm intros. It's a small community and people will share referrals if you make a strong connection with someone. There are a lot of people who kick the tires on making these kinds of moves so you need to do some work to be well prepared. People who made the transition successfully almost always had read a significant amount about the LP world (Swensen book, Capital Allocators Podcast, Institutional Investor) and were able to use examples or adjacencies from their prior work to show they had a good grasp of the issues in LP investing, which involves a lot of people judgment.

There are also some job emails but those are restricted to people in the industry. Most E&Fs don't use headhunters until the senior level as there is not enough budget and they already get good networked flow. Most CIO searches and some asset class heads will be through headhunters, - Hedrick, David Barrett, and Goldsmith are popular.

  • Analyst 2 in IB-M&A
Jun 16, 2020 - 12:18pm

Thanks. Yeah I read Swensen when I interned at an endowment and I'll check out the Capital Allocators Podcast and try to read more Institutional Investor. I do have some contacts in the industry but it is unfortunate to hear that junior roles typically are through network and not headhunters. Maybe a place like Stepstone or AlpInvest is actually more straightforward to break into at the junior level then an endowment or foundation.

  • Intern in IB - Gen
Dec 7, 2020 - 11:10pm

Bump, but -- any specific thoughts on university endowment at one of the biggest (i.e. HYP, Texas System, etc.) if you're an alumni?

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